Federal: Attorneys general from states without sales taxes oppose Marketplace Fairness Act

As the debate wages on over the desirability of the Marketplace Fairness Act of 2013 (Fairness Act), a trio of state attorneys general have heightened their efforts (and publicity) in opposition. If passed, the Fairness Act enables states to require remote sellers to collect and remit sales taxes to other states on such remote sales. This would mean citizens of and businesses in states where sales taxes do not exist would need to collect and remit sales taxes to other states into which they are making remote sales.

Last week, USA Today reported that Montana Attorney General Tim Fox formed a bipartisan multistate coalition of state attorneys general to oppose the Fairness Act. Fox plans to have the coalition attack the bill by researching potential constitutional issues with the Fairness Act. The coalition argues the Fairness Act would be a violation of the Due Process Clause and is therefore unconstitutional. It was reported that Fox’s coalition currently consists of the state attorneys general from Oregon and Alaska.

According to USA Today, Fox argued “Montanans have rejected a sales tax several times, and they certainly don't want to be forced to collect the sales taxes of 9,600 cities, counties and states.” While Fox may be right that citizens of Montana and businesses located in Montana would have to collect and remit sales taxes on qualifying remote sales, the Fairness Act itself does not create a Montana sales tax. Accordingly, a major point of Fox’s argument is that because Montana does not already require collection and remission of sales taxes on its citizens, a federal law should not impose such an obligation on Montana citizens on behalf of other states.

The attorneys general coalition wrote a letter to congressional representatives urging them to oppose the Fairness Act. By passing the law, the coalitions posits there would be “years of costly, protracted and unnecessary litigation” to follow.

A total of five states do not have sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. It is unclear whether other state attorneys general will join this coalition’s cause.

On April 4th, Kentucky Governor Steve Beshear signed into law Kentucky H.B. 440, permitting state licensing agencies to revoke taxpayers’ professional and driver's licenses as a penalty for not paying state taxes. The law goes into effect on July 1, 2013. Any license issued by a state agency is at risk including hairdresser, C.P.A., medical doctor, attorney, and nurse licenses. In fact, H.B. 440 broadly defines a “[professional] license” as “any occupational or professional certification, license, registration, or certificate issued by a licensing agency that is required to engage in an occupation, profession, or trade in [Kentucky].”

Furthermore, H.B. 440 will also block a tax delinquent from registering and licensing their vehicles with the state motor vehicle licensing agency. This law also gives the Kentucky Department of Revenue (the “Department”) the ability to issue administrative regulations to effectuate the law. While the Department claims that license revocation will be “applied rarely” and used as a “deterrent action,” H.B. 440 unquestionably gives the Department more teeth than ever before.

Revenue generated for state pension system

The Kentucky General Assembly’s purpose in enacting H.B. 440 was to create revenue for Kentucky’s state pension system. The revenues from H.B. 440 will begin to contribute to the pension system in February 2015. The Kentucky Legislative Research Commission expects H.B. 440 to generate $95.7 million in the 2015 fiscal year and another $99 million in the 2016 fiscal year. Furthermore, the law’s vehicle registration and license blocking provision is expected to generate an additional $10 million over the next two years.

Other state license revocation laws

Massachusetts and Delaware have similar laws which will revoke both driver’s and professional licenses of those who do not pay their state taxes. Louisiana has laws which revoke driver’s, hunting and fishing licenses for delinquent taxpayers. Similarly, California, Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Oklahoma, Oregon, Pennsylvania, Vermont, and Wisconsin all have laws which will revoke only professional licenses if a person’s state taxes go unpaid.

These types of laws have given rise to widespread concerns about infringing on taxpayers’ rights and subjecting those affected to disparate burdens. For instance, some argue that the laws unfairly burden certain individuals -- those who cannot afford to pay their taxes, those whose occupations require state licensing and those who use driver’s licenses. Additionally, some have argued that by taking away a person’s occupational or driver's license, you are taking away their ability to work or drive to work. This in turn leaves someone with little to no ability to pay their state taxes. Finally, such laws have raised questions of violating the affected taxpayers’ due process rights. However, those questions have generally been resolved in other states by providing that all other tax collection efforts, including appeals, must be exhausted and that the affected taxpayers are given ample notice and opportunity to pay the overdue taxes before licenses are actually revoked.

Delinquent taxpayer due process in Kentucky

H.B. 440 requires that the delinquent taxpayer is given a 20 day notice before the Department will submit their name to the corresponding agency that will revoke the license or stop vehicle registration. That notice is to adequately inform the taxpayer of what is at stake, requiring inclusion of the reason for action, the amount of overdue tax liability (including penalties and interest), other applicable areas of noncompliance that the taxpayer must remedy, and a list of all licenses subject to revocation.

The taxpayer will be able to appeal a license revocation if they can demonstrate a mistake of the fact that they are actually a delinquent taxpayer. However, once a license or vehicle registration has been denied or revoked the taxpayer will not regain these privileges until the licensing agency receives a tax clearance from the Department. Even if a taxpayer is unable to pay the entire amount of their outstanding taxes, if they enter into a payment plan and comply with that payment plan they can avoid having their licenses taken away or avoid interferences with their vehicle registrations. The Department expects that H.B. 440 will not affect many people, considering that 95 percent of Kentuckians pay their taxes on time. Nonetheless, taxpayers should generally take heed, especially in those states that will revoke licenses. Individuals and companies alike should ensure that all state tax liabilities are taken care of to avoid the pesky, time-consuming problem of losing a state license necessary to perform their professional duties or operate their business.

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.